Why CEOs should want better enforcement of labor law

We assume that if a company breaks the law, it will be punished. But when it comes to many foundational worker protections, the actual punishment for a violation is little more than a slap on the wrist. A new bill introduced by House Democrats in July — the LET’S Protect Workers Act — seeks to change that by raising penalties for breaking major labor and employment laws.

This action is long overdue and would be a boon not just to vulnerable workers, but also to ethical business leaders who risk being undercut by unscrupulous competitors. Right now, penalties are often so low that a simple cost-benefit calculation, absent ethical considerations, would tell many firms to break the law.

Take the Fair Labor Standards Act, the federal law that guarantees workers a minimum wage (set at $7.25 an hour since 2009) and overtime if they work more than 40 hours in a week. In the statute, there’s scope for very hefty punishments for firms that break the law. But in practice, punishments are scant.

My research shows that most firms caught underpaying workers by the Department of Labor are just required to pay the worker the wages owed in the first place — with no additional financial cost to the firm at all. About one-third of firms have to pay additional damages. Only 6 percent are required to pay a civil monetary penalty on top of this — and the amounts are small, very rarely adding up to much more than the initial underpayment. While many states have heftier enforcement apparatuses and higher penalties, the federal level is the baseline for more than half of the U.S.

Perhaps the starkest contrast is with property theft — a crime that is routinely punished by imprisonment. Shoplifting goods worth $2,500 or more, for example, can lead to felony charges and imprisonment in every state. Failing to pay workers what they are legally owed — wage theft — can in theory also lead to criminal charges, but almost never does.

From 2005 to 2020, the Department of Labor identified more than 90,000 cases where a firm underpaid its workers by $2,500 or more — with total underpayment across these cases of $570 million. Only 26 cases from this time led to criminal convictions, with three fines and no prison sentences.

When people steal from companies, they pay a heavy price. When companies steal from their workers, they don’t.

That is, if a violating firm gets caught at all. The Department of Labor’s inspection resources simply can’t stretch as far as their remit: for every federal wage-and-hour division investigator, there are about 175,000 workers covered by the statutes they enforce. The Labor Department targets its enforcement activity on sectors with high violation risk, but even in these cases research estimates the chance of a random inspection in any given year is less than 2 percent.

The troubling reality is that it’s more profitable for many firms to break minimum wage and overtime laws than to comply with them — and indeed they do, in droves. Companies illegally underpay workers in this way to the tune of several billion dollars each year.

This is striking enough, but for certain other worker protections, the incentive for employers to comply is even weaker. Look at the union protections in the National Labor Relations Act. The NLRA imposes no financial penalty for illegally firing a worker for union organizing — it merely requires the offending firm to reinstate the dismissed worker with compensation for lost earnings. And even once workers have voted for a union, a firm may simply stall to avoid reaching a contract. Failure to bargain in good faith is illegal, but carries no financial penalty.

For firms unconcerned with ethics or reputation, this means there is essentially no deterrent to breaking the law. Is it any wonder, then, that at least one worker is illegally fired in an estimated 20 to 30 percent of union elections, and that more than half of newly certified unions don’t get to a first contract within a year?

These labor rights violations are clearly a serious problem for the affected workers (who are disproportionately likely to be lower-income and racial or ethnic minorities). It’s also an underrated problem for the rest of the business world. Unscrupulous firms that break the law undermine the businesses that want to be ethical, and this puts the principled businesses at risk of being out-competed by the firms that don’t mind breaking the law. They’re forced to compete against firms that are obtaining an illegal advantage top cut labor costs. Just a few bad actors can generate a race to the bottom in a whole industry.

For ethical business leaders, this is their problem, too. Supporting increases in penalties for violators, particularly for the most severe and willful violations, is one way to ensure that a level playing field applies across the board. Additionally, they can advocate for a more effective enforcement system — one that is sufficiently well-resourced to inspect firms and respond to worker complaints, and one that actually imposes meaningful penalties on firms that break the law.

Anna Stansbury is the Class of 1948 Career Development Assistant Professor and an assistant professor of Work and Organization Studies at the MIT Sloan School of Management.